A. Since the firm is profitable, income is greater than expenses, so increasing both income and expenses by the same percentage will cause the increase in income to be larger than the decrease in expenses. As a result, net income will increase and, since investment would not change, ROI will increase.
B. Decreasing sales will decrease income and decreasing expenses will increase income. Since the firm is profitable, income is greater than expenses, so decreasing both income and expenses by the same percentage will cause the decrease in income to be larger than the decrease in expenses. As a result, net income will decline and, since investment would not change, ROI will decrease.
C. One way to solve this problem is to simply set up a basic ROI of, for example, $100,000 of profit ÷$400,000 total assets giving a ROI of .25, and then go through the choices changing these figures as outlined in each option. In this choice we would increase sales (which will increase income) and expenses (which will decrease income) by the same amount. This will cause income to remain unchanged and so will not change the ROI of the company.
D. One way to solve this problem is to simply set up a basic ROI of, for example, $100,000 of profit / $400,000 total assets giving a ROI of .25 and then go through the choices changing these figures as outlined in each option. In this choice we should increase the investment (the denominator) and expenses (which will income) by the same amount. Let us assume that this amount is $50,000. That would make the ROI calculation $50,000 ÷ $450,000, which is .111, or a decrease in the ROI.
